Amazon, Incentives and Alternate Opportunity Cost

George Mason University’s Mercatus Center does not like the deals struck by Virginia and New York to split Amazon, Inc.’s $5 billion HQ2 project. In a new commentary, the market-oriented research center raises a valid consideration rarely mentioned by politicians touting favored government expenditures of any type: alternate opportunity cost. Money spent on “A” is money not spent on “B.”

Write Michael Farren and Anne Philpott in The Bridge, the Mercatus blog:

Every dollar spent by a state or municipality on corporate handouts is a dollar that could have gone to lowering taxes or to a valuable government service like safety, education, or infrastructure, and many of these alternate investments have serious job-creating potential. To make matters worse, subsidies typically don’t sway corporate location decisions, meaning that subsidies are a waste of public resources. In fact, Amazon based its final decision on factors besides handouts—like the availability of tech talent in the local workforce.

By way of illustration, the authors say that with the money dedicated to Amazon job-creation incentives, Virginia could reduce corporate income taxes by 5.6% or pay full tuition for 2,700 University of Virginia students.

Their abstract point is incontestable. However, their argument is incomplete. Virginia has structured the deal so that sales and income tax revenue generated by Amazon and its employees will exceed the cost of incentives by a wide margin. Thus, according to the Northam administration, the Amazon deal will create more resources to spend on things like corporate income tax cuts, tuition subsidies, or whatever the General Assembly decides it wants.

However, that argument, too, is incomplete. True, an estimated 25,000 Amazon employees averaging $150,000 a year in salary will generate a boodle of tax revenue. However, those employees will demand state and local services as well. At the very least, they will increase the load on the regional transportation system, and they will increase the number of students enrolled in K-12 schools and Virginia institutions of higher education, which the state helps pay for. Any useful accounting of Amazon’s impact would provide a net benefit — tax revenues after deducting the cost of incentives and additional state spending. I have yet to see a calculation of that figure, and until we see it, it is impossible to have an informed discussion of the fiscal pros and cons of the Amazon deal.

If Mercatus scholars want to continue criticizing the deal, they cannot content themselves with simply pointing out the truism that alternate opportunity costs exist. They need to show that the net tax impact of the deal to Virginians is a loser. They may be right. Perhaps the deal is a loser. But they haven’t made the case.

Update: VEDP’s Stephen Moret says that the state has, in fact, conducted a net fiscal impact analysis.” With input from other state agencies, VEDP estimated that the Amazon project will net $1.2 billion in General Fund revenues over 20 years “after accounting for all potential related state expenditures, including company incentives, higher education investments for the benefit of the whole Commonwealth, and K-12 expenditures associated with increased school enrollments.” Also, the project will generate $430 million in transportation-related non-general fund revenues, “well in excess of planned transportation investments to benefit the area.” As a check on its state revenue estimates, VEDP also commissioned a third-party economic and fiscal impact analysis by the Fuller Institute at George Mason University.

George Mason was cited as being part of the deal and there was a statement from its president and a description of what is being done on the Arlington campus a couple of metro stops away. I’m pretty sure Mercatus is operating separately from the part of GMU that is working on the university’s role in business development.

Larry, you always try to put a clear blue/red delineation on business and economic development initiatives, but I have not seen that in my experience. I’ve seen red governors chase deals with incentive packages that may be ill-advised (e.g. Wisconsin and Foxconn). I’ve seen deep blue states like Maryland on this deal concluding that the underlying business climate was the issue, not the incentive package, which was comparatively very large. (Steve Haner has commented that this underlying climate should be the major focus for a state rather than chasing deals, and I agree.) The reality is both blue and red states pursue these projects, and many times they are spending too much if the opportunity costs are considered. A lot of assessments of the stadium funding packages show they have no chance of paying off. Many others try to hide the total costs so that this type of analysis cannot be done.

As you can probably tell, I like to sift through details when and if I have the time, and I will admit that I have not spent too much time on the Amazon deal. That said, I haven’t seen anything so far that concerns me greatly. I think the relative level of transparency has been high, and I’ve liked what I’ve heard from the administration and Mr. Moret. It has been great to have him contribute on this forum.

I think Virginia needs to get its mojo back and reinvent/reinvigorate NOVA. This project helps with that. I am particularly interested in the future of the new Virginia Tech campus. Many have commented on this board that, while we have fine higher education institutions, we don’t have them located or deployed in a way that bolsters economic development (in contrast to say Research Triangle in NC or the University of Texas in Austin).

I think Mercatus is right in a generalized sense, but I would disagree on this project based on what I’ve seen.

“Virginia has structured the deal so that sales and income tax revenue generated by Amazon and its employees will exceed the cost of incentives by a wide margin.” Oh, Jeez, Jim, the paperwork on every single deal since the Virginia Company was touting its offshore investment at Jamestown has made the same claim. Of course they tried that pitch on the King’s Privy Council!
(Certainly every deal I work on did that….) In this case it is mostly a back-end payout, but Virginia always pushed for that.

The key question starts with two words: “But for…..” But for these incentives, what different would have happened? The company on the receiving end always says, hell, we’d have gone somewhere else! We would have made less of an investment or no investment. And who will ever know….

“The key question starts with two words: “But for…..” But for these incentives, what different would have happened? The company on the receiving end always says, hell, we’d have gone somewhere else! We would have made less of an investment or no investment. And who will ever know….”

Of course, know one ever will. And only a fool would have taken the risk of finding out.

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